How did Kentucky nonprofits end up taxed?

by Sam Dick |

LEXINGTON, Ky. (WKYT) – Frustration and even anger — that’s how the leaders of some Kentucky nonprofits are reacting to the new 6 percent service tax.

From taxing ticket sales to galas and fundraisers to taxing sponsorships, nonprofits are having to adjust to a new financial landscape. Thousands of Kentucky nonprofits are affected including
Lexington Habitat for Humanity. This year they are celebrating 30 years of building homes in Lexington. It’s a milestone, but it comes at a challenging time.

Effective now, every ticket sold to a gala or fundraising event is taxed at 6 percent. For their golf tournament this month, Habitat is absorbing the taxes on all the registrations.

“You’re talking about 6% of 24 golf teams that are a thousand dollars apiece…so it’s not an insignificant number,” Habitat’s CEO, Rachel Childress says.

Other nonprofit leaders are sharing similar concerns.

“There’s a lot of frustration, some anger. Concern and anxiety. How is this going to impact our fundraising?” Kentucky Nonprofit Network executive director Danielle Clore asks.

Clore’s organization represents hundreds of charitable groups big and small. They are all affected by this new tax.

“A lot of organizations are very small. They may have one, two staff persons so they’re out now hiring CPA’s to guide them and really having to revamp all of their practices.”

A tax on ticket sales is just the start. Nonprofits may have to pay taxes on auction items sold at their events. Sponsorships will be taxed if they include any hospitality, like meals, drinks, or blocks of tickets. And not just a portion of the sponsorship will be taxed, but the entire amount.

“It’s going to hurt charities, and it’s going to hurt people, and we’ve got to put a stop to it,” Stewart Perry says. Perry works on many charitable events, including the Kentucky Three-Day Event held in April at the Kentucky Horse Park.

“4-star event, largest horse event in America in this kind. Every entry, so when a rider makes an entry, 6 percent. Every ticket, 6 percent. Every sponsorship and we have sponsorships upwards of six figures, 6 percent. So it’s hurting us severely.”

While the tax on ticket sales and auction items may seem new, they’ve actually been on the books for decades. It’s just that the Kentucky Revenue Department never enforced it. Now they are, and part of the reason came from the state Supreme Court.

A month before lawmakers passed tax reform in April, the state Supreme Court ruled that nonprofits were not exempt from collecting taxes on admission tickets.

“The Supreme Court decision addressed the issue of admissions, the sale of admissions. And it clarified that nonprofits are not exempt from their sales of admission,” Richard Dobson of the Kentucky Revenue Dept. says, It’s not like the department arbitrarily said, ‘Well this is the decision to tax these things,’ but we have to administer the tax laws according to the law of the Commonwealth.”

Legislative leaders say their tax reform never intended to include taxing nonprofits.

“The court decision definitely made it unusual,” House Speaker David Osborne, R – Prospect, says, “I think had it not been for the court decision, there would have been no reason for Revenue to interpret anything differently from the way they’ve interpreted over the years.”

Osborne has pre-filed a bill to exempt nonprofits from paying taxes on admission tickets, but it will be next year before lawmakers can address it.

Accountants are sharing similar sentiments.

“It’s been a tricky mess,” Erica Horn with accounting firm Dean Dorton Allen Ford says.

CPAs are working with nonprofits to deal with the new tax, and yes, that includes churches selling tickets to fundraisers.

“If you’re selling a ticket to something, I think the answer is yes, regardless of who you are. I don’t think that’s a constitutional issue. I don’t think there’s a separation of church and state problem there because the tax is really passed on to the person purchasing the ticket,” Horn says.

Legislative leaders say the soonest they can change the taxing of tickets and auction items is next year during the general session. Until then, the tax is the new reality for nonprofit groups.